Interest rates have never been so low, never has consumer price inflation been so high. While the key interest rate is still 0 percent and the bond purchase programs are only being scaled back slowly, inflation is well above the European Central Bank’s inflation target of two percent, particularly due to rising energy prices. The inflation rate in the euro area is said to have risen by 5.1 percent in January, in Austria it was 4.6 percent.
Consumer price inflation reflects the rise in prices for everyday goods, such as housing and groceries. The money glut after the financial crisis had no effect on this part of the inflation in many industrialized countries for a long time. The value remained very low in the euro zone, averaging just around one percent between 2013 and 2019. And that despite the fact that the ECB has acted expansively almost throughout the past ten years and pumped more and more money into the market.
The billions flowed into assets, especially real estate, but also into stocks and most recently into cryptocurrencies. Unlike consumer price inflation, asset price inflation rose enormously. The ECB does not counteract this type of inflation to the same extent as it normally does with consumer prices. Regulators are currently trying to get the high real estate prices under control with new lending requirements. But that’s a long way from active countermeasures. This creates opportunities for investors: there is nothing individuals can do about the high heating costs, but asset price inflation can be used to their advantage.
Word has probably got around by now that the negative real interest rates have made the savings account unusable for long-term investments. Although there are still hundreds of billions of euros lying around in Austrian savings accounts, most people know that there are other options.
You can hardly avoid a broadly diversified portfolio for long-term investments. Anyone who invested one euro in shares in 1980 at the Schilling exchange rates at the time would have gotten more than 20 times as much in real terms by the end of 2021. Also with
Gold would have been a real gain.
Held as cash, a euro from 1980 would only be worth around 40 cents today. These historic gains need not be repeated in the future. But they are an indication of which forms of investment are profitable and which are not.
Even if many central banks are currently changing course and raising interest rates: In the long term, asset price inflation, which is additionally fueled by monetary policy, will continue to play a role. At the end of the day, it’s all about beating consumer price inflation and maybe making some extra money. Assets have more than proven themselves in the past. Those who do not need their money in the long term should use these opportunities.
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